What are the tax benefits of a 529 plan?

Wallis is a mom who spent 10+ years at Goldman Sachs as a banker and investor. She founded AboveBoard as a "safe harbor" where people are treated with integrity and can make big decisions with ease and clarity. AboveBoard's interactive Parents' Financial Guide helps you make the right decisions for your family.

Here are the quick facts on 529 plan tax benefits:

Contributions are never tax-deductible for Federal taxes.

Contributions are sometimes tax-deductible for state taxes, it depends on the state you're in.

Among states that offer tax benefits, some require you to use their own 529 plans while others do not. (Our interactive AboveBoard College Savings Guide will walk you through the rules in your state)

Your 529 plan savings grow free from any future taxes when you use the money for qualified educational expenses at eligible schools.**

Have questions about what "qualified educational expenses at eligible schools" means? We explain here.

**Except in Alabama. More on that below, if you care.

Check your local taxes, if your state offers a tax break.

Some places, including New York City, permit the same tax deduction that exists at the state level on your local taxes.

Contributions to 529 plans count as gifts for Federal tax purposes.

You can gift up to the annual gift tax exclusion ($14,000 / giver-receiver pair in 2017, $15,000 in 2018).

Example: Two parents gift $30,000 to each of their 2 children in 2018

529 plans offer a special option to accelerate 5 years of gifting.

Example: two grandparents open a 529 plan for their grandchild in 2018 and contribute $150,000

**Alabama has a different approach from any other state: it collects state income tax on any gains in out-of-state 529 plans when you do a qualified withdrawal. The typical approach, followed by all the other states, is not to tax gains in 529 plans (regardless of which state's plan) so long as the money is used for qualified educational expenses at eligible schools (aka a "qualified withdrawal").

AboveBoard Financial Inc. offers educational content and tools to help our site visitors learn and gain clarity on financial topics. We make our best effort to keep information up to date and accurate, and it should be read as general educational information, not personalized investment, tax, or legal advice.

AboveBoard Financial Inc. is also the parent company of AboveBoard Insurance Services, LLC (“AIS”) and AboveBoard Wealth Management, LLC (“AWM”). AIS is a licensed independent insurance broker. AWM is a registered investment advisor. If you are interested in learning more about becoming a client of AIS or AWM, get in touch with us at concierge@aboveboardfinancial.com - we’ll be happy to help you with honesty and care!